Economics Dictionary of ArgumentsHome
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| Factor Price Insensitivity: Factor Price Insensitivity (FPI) is a concept in international trade theory, particularly within the Heckscher-Ohlin framework. It states that if a country produces both goods (diversified production) and faces given world product prices, then the prices of its factors of production (like wages and rental rates) will remain unchanged even if the country's factor endowments (e.g., labor supply, capital stock) change. This holds under specific conditions, notably the absence of factor intensity reversals. See also Trade, International trade, Heckscher-Ohlin model._____________Annotation: The above characterizations of concepts are neither definitions nor exhausting presentations of problems related to them. Instead, they are intended to give a short introduction to the contributions below. – Lexicon of Arguments. | |||
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Robert C. Feenstra on Factor Price Insensitivity - Dictionary of Arguments
Feenstra I 1-13 Factor Price Insensitivity/Leamer/Feenstra: Lemma: So long as both goods are produced, and factor intensity reversals (FIR) do not occur, then each price vector (p1, p2) corresponds to unique factor prices (w, r). This is a remarkable result, because it says that the factor endowments (L,K) do not matter for the determination of (w, r). We can contrast this result with a one-sector economy, with production of y = f(L,K), wages of w = pfL , and diminishing marginal product fLL<0. In this case, any increase in the labor endowments would certainly reduce wages, so that countries with higher labor/capital endowments (L/K) would have lower wages. This is the result we normally expect. In contrast, the above Lemma says that in a two-by-two economy, with a fixed product price p, it is possible for the labor force or capital stock to grow without affecting their factor prices! Thus, Leamer (1995)(1) refers to this result as “factor price insensitivity.” Feenstra I 1-19 (…) when only one good is produced, then factor prices are determined by the marginal products of labor and capital as in the one-sector model, and will certainly depend on the factor endowments. This is why the Lemma stated above requires that both goods are produced, or equivalently, that the endowments are inside the “cone of diversification.” Feentra I 2-46 Models: With more factors than goods, the “factor price insensitivity” lemma no longer applies. This can be tested by estimating a GDP function for a country (or a group of countries), and determining whether it is linear in the factor endowments, i.e. whether the functional form (…) holds globally or the elasticities (…) are locally insignificantly different from zero. The results of Kohli (1990(2), 1993a(3)) for the U.S. indicate that the elasticities (…) are non-zero, but only weakly so. Thiscan be interpreted as evidence in favor of “more factors than goods.” One reason for this is that capital might be slow to move between sectors, so with N sectors there are N fixed factors (capital in each sector) plus the additional mobile factors (types of labor). Kohli (1993b(4)) develops a test for this production structure and finds some evidence to support it using annual data for the U.S.. 1. Leamer, Edward E., 1995, “The Heckscher-Ohlin Model in Theory and Practice,” Princeton Studies in International Finance, no. 77. 2. Kohli, Ulrich R., 1990a, “Price and Quantity Elasticities in Foreign Trade,” Economic Letters, 33(3), 277-281. 3. Kohli, Ulrich R., 1993a, “A Symmetric Normalized Quadratic GDP Function and the U.S. Demand for Imports and Supply of Exports,” International Economic Review, 34(1), February, 243-255. 4. Kohli, Ulrich R., 1993b, “U.S. Technology and the Specific Factors Model,” Journal of International Economics, 34, 115-136._____________Explanation of symbols: Roman numerals indicate the source, arabic numerals indicate the page number. The corresponding books are indicated on the right hand side. ((s)…): Comment by the sender of the contribution. Translations: Dictionary of Arguments The note [Concept/Author], [Author1]Vs[Author2] or [Author]Vs[term] resp. "problem:"/"solution:", "old:"/"new:" and "thesis:" is an addition from the Dictionary of Arguments. If a German edition is specified, the page numbers refer to this edition. |
Feenstra I Robert C. Feenstra Advanced International Trade University of California, Davis and National Bureau of Economic Research 2002 |
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